Confiscation under Section 13(2) of FEMA is Discretionary: SAFEMA Tribunal’s Ruling in Union of India Vs Tamilnad Mercantile Bank Ltd.

Introduction

In Union of India Vs Tamilnad Mercantile Bank Ltd. (Appellate Tribunal under SAFEMA, New Delhi), the Tribunal was called upon to decide a narrow but significant question: whether confiscation of shares under Section 13(2) of the Foreign Exchange Management Act, 1999 (FEMA) is mandatory once a contravention is established, or merely discretionary.

While several serious violations under FEMA relating to transfer of bank shares to foreign investors, escrow structures, guarantees, deposits and foreign exchange dealings were upheld, the core controversy in this appeal was confined to the non-confiscation of shares of Tamilnad Mercantile Bank Ltd. (TMBL), despite the Adjudicating Authority having imposed substantial monetary penalties.

The Tribunal ultimately rejected the Union of India’s challenge and confirmed that confiscation under Section 13(2) is not automatic, but is a matter of judicial discretion to be exercised by the Adjudicating Authority on the facts of each case.

Background of the Proceedings

Origin of the FEMA Investigation

The Directorate of Enforcement commenced investigation on 11.10.2011, based on information received from the Reserve Bank of India (RBI) through its letter dated 16.03.2011. RBI had flagged transactions concerning transfer of shares of Tamilnad Mercantile Bank Ltd. (TMBL) from the Sterling Group of Companies to multiple entities and individuals.

RBI also shared key documents including:

  • Amended and Re-stated Escrow and Transaction Settlement Agreement dated 12.05.2007, and
  • Related correspondence regarding transfer of TMBL shares.

Following the investigation, a Complaint under Section 16(3) of FEMA was filed on 16.12.2014, and a Show Cause Notice (SCN) dated 17.12.2014 was issued to 26 Noticees. Out of these, 23 Noticees filed separate appeals against the Adjudicating Authority’s order; those appeals were decided by the Tribunal in a different order.

The present appeal, however, was filed by the Union of India (through the Directorate of Enforcement) exclusively for seeking confiscation of TMBL shares in addition to penalties already imposed.

Key Findings of the Adjudicating Authority

The Special Director, Enforcement Directorate, Chennai (Adjudicating Authority – AA) passed Adjudication Order No. SDE/SRO/CEZO/10/2020(SK) dated 14.08.2020. The order confirmed several FEMA contraventions and imposed penalties on multiple parties, but did not direct confiscation of the shares in question.

Penalties on Tamilnad Mercantile Bank Ltd. (TMBL)

The AA imposed penalties of:

  • Rs. 11,33,21,688/-, and
  • Rs. 5,66,60,844/-

on TMBL for violation of:

  • Section 6(3)(b) of FEMA, read with
  • Regulation 4 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

These violations related to the transfer of TMBL shares to foreign investors without prior RBI approval.

Penalties on Standard Chartered Bank (SCB)

Standard Chartered Bank (SCB) was penalised as follows:

  • Rs. 34,00,00,000/- for contravention of Section 6(3)(f) of FEMA read with Regulation 3 of the Foreign Exchange Management (Deposit) Regulations, 2000; and
  • Rs. 66,00,00,000/- for contravention of Section 6(3)(j) of FEMA read with Regulation 3 of the Foreign Exchange Management (Guarantees) Regulations, 2000.

These violations arose out of unauthorised deposit and guarantee structures linked to the financing of share acquisition through escrow mechanisms and collateral arrangements without RBI permission.

Penalties on Officials and Individuals

The AA also levied penalties on various individuals, including:

  • Chairmen, Managing Directors, CEOs, Directors and Company Secretaries of TMBL, in the range of Rs. 5,00,000/- to Rs. 1,00,00,000/-, depending on their roles and involvement.
  • An officer of SCB, who was penalised Rs. 40,00,000/-.
  • Shri M. G. M. Maran, who was penalised Rs. 35,00,000/- for violations under:
    • Section 4 and Section 8 of FEMA, read with
    • Regulation 3 and Regulation 4 of the FEM (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000, and
    • Regulation 3 of the FEM (Foreign Currency Accounts by a person resident in India) Regulations, 2000.

Four Sets of Issues Identified

The AA structured its order around four distinct clusters of issues:

1. First Set: Transfer of 46,862 Shares to Foreign Investors

  • 46,862 shares of TMBL were transferred to seven foreign investors.
  • Total consideration: Rs. 113,32,16,884/-.
  • There was no prior RBI approval for this transfer.
  • The AA held this to be a contravention of:
    • Section 6(3)(b) of FEMA, read with
    • Regulation 4 of FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

TMBL and several associated officials appealed these findings in separate appeals.

2. Second Set: Subsequent Transfers to Mauritius Entities

After the initial transfer of 46,862 shares, certain shares were again transferred:

  • 13,209 shares of TMBL to M/s Sub-Continental Equities Ltd., Mauritius on 26.12.2011 for Rs. 90,31,41,094/-.